Wealth management for LGBT couples

Transcription

1 Wealth management for LGBT couples

2 Creating a financial strategy for you and your partner Whether you and your partner are legally married or not, implementing a sound strategy, with the proper documentation and the right protections, will help enable you and your family to pursue your wealth management and legacy goals. A coordinated approach for same-sex couples Same-sex married couples have gained important rights and benefits as a result of the U.S. Supreme Court s ruling in United States v. Windsor holding Section 3 of the Defense of Marriage Act (DOMA) unconstitutional. Even in light of this ruling, however, questions remain concerning the benefits to which same-sex spouses are entitled and the rights they may have. In comparison, domestic partners do not enjoy the same automatic legal rights and benefits as same-sex and opposite-sex married couples. Addressing complex financial needs successfully requires a strategy that goes beyond investment advice to integrate retirement, estate planning, banking, trust and other considerations. At Merrill Lynch, we realize the importance of building an advisory team that understands the unique challenges you face. The right team of professionals can help you make informed decisions, ensure a secure financial future and work to make sure your legacy is carried out according to your wishes. Your Merrill Lynch Financial Advisor can work with you and your spouse or partner, taking the time to understand your goals. He or she can draw upon all the resources of Merrill Lynch and work with outside professionals including your Certified Public Accountant (CPA) and your attorney experienced in lesbian, gay, bisexual and transgender (LGBT) planning issues to help you find solutions that satisfy your specific situation. State and federal partner status No matter what happens at the state level, domestic partners are not treated as spouses under federal law. The Supreme Court decision in United States v. Windsor does not apply to civil unions, domestic partnerships or any other non-marriage relationship that is not a lawful marriage. And while domestic partnership issues (including civil unions and the very definition of domestic partnership ) are typically subject to the laws of each particular state, there are significant differences from state to state. While Merrill Lynch does not provide legal, accounting or tax advice, we can work with your team of outside advisors to make sure you understand the complexity and potential financial implications of your partnership. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation ( BAC ). Investment products offered through MLPF&S and insurance and annuity products offered through Merrill Lynch Life Agency Inc.: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Insured Are Not Deposits By Any Federal Government Agency Merrill Lynch Life Agency Inc. is a licensed insurance agency and a wholly owned subsidiary of BAC. 2 Are Not a Condition to Any Banking Service or Activity

3 Understanding the challenges Information and a strong financial strategy are the keys to addressing the unique issues you face. We can work with you to provide an approach that integrates your needs. Tax issues From a tax perspective, same-sex spouses are entitled to all federal tax benefits as opposite-sex spouses, regardless of their state of residence. If the couple is lawfully married in a jurisdiction which permits same-sex marriage, including a foreign jurisdiction, any state or the District of Columbia, then they will be treated as married for all purposes of the federal tax laws, including income, gift and estate tax laws. Consequently, a couple married in a state permitting same-sex marriage who later moves to a state that does not recognize same-sex marriage will still be treated as married for purposes of all federal tax laws. For domestic partners, on the other hand, no matter how committed and long-standing your relationship, you and your domestic partner, for tax purposes, may not file as married. Legal ownership and protection of assets Because there is no legal marriage contract, you and your domestic partner need to work with your legal advisors to devise your own contractual agreements that address the ownership, disposition, maintenance, management and protection of your assets. These include cohabitation, partnership and dissolution agreements. In addition, domestic partners who wish to purchase a home or other property should consider a joint-ownership agreement that protects both partners, similar to a business partnership agreement. Same-sex spouses should consider a pre- or post-nuptial agreement to help document intentions, define rights and provide useful protection for both spouses. Asset titling Ownership of assets determines how they will be distributed in the future. Many domestic partners own assets as joint tenants with rights of survivorship, which allows an asset to pass irrevocably to a surviving partner. It is important to remember that only assets titled in your individual name are governed by your will. Other assets pass, as designated, to co-owners and/or other beneficiaries. Although owning assets as joint tenants with rights of survivorship simplifies the distribution scheme, it may fail to resolve tax or asset management concerns. You may also discuss with your attorney or CPA such options as single ownership, trusteeships and tenants in common. Health care Have you prepared for health care issues, such as the possible incapacity of you or your spouse or partner? Who will make medical and life-care decisions for each of you? Insurance Same-sex spouses don t face some of the challenges that other same-sex couples must address, such as: If your employer offers domestic partner benefits such as health insurance, your domestic partner may not be treated as a spouse and the benefits may be taxable. In addition, life insurance companies may require you to demonstrate an insurable interest when purchasing life insurance for each other. Homeowner insurance may not cover damage and losses if only one partner s name appears on the deed. And car insurance may have increased liability if vehicles are co-owned. 3

4 Preparing for retirement: Only the beginning Pursuing the retirement you want means working with a financial advocate who knows where you want to go. Your Merrill Lynch Financial Advisor can help you create customized strategies, based on your goals, that are designed to provide asset growth and can help you maintain appropriate levels of income in the future. Social Security benefits In the event of one partner s death, Social Security survivor, retirement and death rights and benefits do not pass to the surviving partner unless the couple is lawfully married. The issue of Social Security can also be a concern if children are involved. 401(k) plan If you have a 401(k) plan from a former employer and IRAs with multiple providers, you may want to consider rolling over those assets into a traditional IRA. An IRA gives you greater flexibility to select beneficiaries and often offers a wider range of investment choices and distribution options. A Merrill Lynch Trusteed IRA can further enable distribution of these assets in a way that may be desirable for you, your spouse or partner or other beneficiaries. Updating beneficiary designations It is critically important to make appropriate beneficiary designations for your IRA. When no beneficiary is designated for an IRA, for example, the assets will likely pass to your estate. Updating your beneficiary designations helps to ensure that your assets pass in accordance with your wishes. Note that for same-sex spouses, certain qualified retirement plans require that a spouse be designated the beneficiary unless he or she waives his or her rights. Inherited IRA assets and distribution options Upon your death, your domestic partner (as a non-spouse beneficiary of your qualified retirement plan, such as a 401(k) plan) can roll over assets to an inherited IRA. The distribution options available to domestic partners within the inherited IRA are the same as those available to other non-spouse beneficiaries. Although the options are more limited than those available to spouse beneficiaries, your domestic partner would have the choice of taking distributions based on his or her own life expectancy, thereby avoiding immediate taxation of all the assets and continuing the potential for tax-deferred growth. This still falls short, however, of the options available to a same-sex or opposite-sex spouse who can achieve even greater tax benefits by rolling over his or her spouse s 401(k) or IRA to his or her own IRA. This action delays the start of required minimum distributions, thus increasing tax-deferral benefits. Hardship distribution A hardship distribution allows individuals who list their same-sex partner or other non-spouse beneficiary under a 401(k) plan to tap into their retirement funds in the case of certain medical or financial emergencies of the beneficiary. In the past, federal law only permitted such withdrawals for employees legally recognized spouses or dependents. You should work with your Financial Advisor and CPA to understand all of your options. 4

5 Your estate, your wishes With the right insights, you can transfer value (your wealth) and values (your legacy) and see the benefits during your lifetime. To do this, it s essential that you have a plan in place. Liquidity strategies Federal estate taxes can shrink your estate dramatically, and some states also impose death taxes. Unlike for same-sex spouses, there is no marital deduction for domestic partners and they are limited to an annual gift-tax exclusion for transfers between partners and lifetime gift- and estatetax exclusion. Domestic partners should consider liquidity strategies for example, life insurance to pay taxes, administrative expenses and other debt. Estate tax and capital gains issues Unlike for same-sex spouses, generally 100% of any property held as joint tenants will be included in the estate of the first domestic partner to die. If his or her estate exceeds the federal estate tax exemption equivalent, then estate tax will be due on the full value passing to the surviving domestic partner. There will be some consolation in the fact that the surviving domestic partner will receive a step-up in basis on 100% of the jointly held property. In contrast, same-sex spouses benefit from the unlimited estate tax marital deduction, portability of the applicable exclusion amount, and usually only one-half of the value of joint property being included in the estate of the first spouse to die. Planning for optimal results To avoid including 100% of the joint property in the estate of the first to die, the surviving partner will need to be able to show that he or she contributed to the purchase and maintenance of the property. (Of course to the extent jointly held property is not included in the taxable estate of the first to die, it will also not receive a step-up in basis.) Beneficial strategies Some estate planning strategies are beneficial for domestic partners. They can provide for the transfer of ownership of assets, often in a discounted or taxeffective manner, and may even provide an advantage because you are not legally married. Some charitable strategies that treat your partner as the noncharitable beneficiary may afford significant transfer and income tax opportunities. Charitable giving You might consider grant-making strategies, such as donor-advised funds and family foundations, or retained income strategies, such as charitable remainder trusts and pooled income funds. Wealth transfer strategies, such as charitable lead trusts, enable investors to support their current philanthropic ideals while providing an opportunity to transfer wealth to succeeding generations in a tax-advantaged manner. There are no limits to the amount of cash or securities you can give to charities, but there are annual limits to the amount you can deduct. A variety of giving strategies can help you lower your tax liability today, as well as allow you to remove highly appreciated assets and future appreciation from your estate, depending on your income. Planning with children If you have or desire to have children, talk with an attorney about foster parenting, surrogacy, parenting agreements and guardianships; adoption laws, including rights in states that prohibit joint and second-parent adoption for same-sex couples and state court rulings in disputes between surrogates and birth parents; the tax advantages of adoption credits and head of household filing status for domestic partners; and managing and protecting assets for children through trusts and other investment accounts. 5

6 Facing the issues together Scenario 1: A plan for retirement Todd and David, a same-sex couple for 20 years, and who are not in a formal relationship (married, domestic partnership or civil union), hold substantial assets, the bulk of which is in real estate Todd inherited from his family. With retirement approaching, they seek assistance from a Merrill Lynch Financial Advisor. Raising awareness The Financial Advisor reminds the couple that, because David is not legally considered Todd s spouse, they cannot retitle Todd s property to include both names without potentially incurring a significant gift tax. Further, if Todd passes away first, the size of his estate would be drastically reduced by estate taxes, leaving David with even fewer assets. The estate might be forced to sell the real estate, including the couple s shared home. Also, David s resulting inheritance might not be enough to sustain his original standard of living. Creating an income solution The Financial Advisor suggests a strategy that includes Todd selling the mineral rights of his land to a trust to fund a life insurance trust with David as the beneficiary. This will create a steady income stream for David in the event of Todd s death while reducing the taxable estate and therefore the possible impact of estate taxes. The Financial Advisor also recommends that Todd transfer some of his holdings into a charitable trust, reducing David s potential estate tax obligation and helping create additional income for the couple while fulfilling their philanthropic goals. Scenario 2: A child s future Michelle and Jennifer are the proud parents of Ben, Jennifer s natural child conceived through in vitro fertilization. As Ben turns seven, they decide to contact a Merrill Lynch Financial Advisor for help in structuring their $12 million in assets in an effective, disciplined manner. Defining objectives The couple s Financial Advisor determines that three key objectives should be addressed: The family needs to fund Ben s college education; clearly establish their wishes for Ben s guardianship in case anything happens to Jennifer; and document their inheritance plan. Since the couple lives in a state that doesn t recognize a domestic partner s right to legal adoption, their Financial Advisor suggests they work with their attorney to ensure the proper protections are in place for Ben s future. Supporting the life you envision The Financial Advisor sets up a 529 college plan 1 and a Coverdell Education Savings Account to help Michelle and Jennifer invest money for Ben s future tuition expenses in a tax-advantaged way. In addition, the Financial Advisor works with the couple s attorney to establish an estate plan. The attorney also works with the couple to determine an effective way to establish their guardianship rights and wishes with regard to Ben. These scenarios are for illustrative purposes only. Given that each client s needs, goals and situation are unique, each client is evaluated independently. Strategies and solutions are recommended on a case-by-case basis and may not be appropriate in all instances. 6

7 Helping you pursue the life you want Understanding what matters most to you These days, having powerful financial experience in your corner is essential. Your Financial Advisor can help you build and transfer your wealth, satisfy your liquidity needs and plan for maintaining sufficient retirement income. Drawing upon our broad array of solutions allows us to offer you sophisticated financial strategies that go beyond investing in stocks and bonds to address every aspect of your financial life. With direct access to professionals who are familiar with the challenges same-sex couples face, your Financial Advisor can help you implement an investment strategy that is appropriate for you. We believe that a one-on-one relationship with a Merrill Lynch Financial Advisor who understands your situation, your needs and what you want to accomplish and who has access to the resources of Bank of America can help you pursue the life you always wanted. To learn more about implementing an investment strategy that is appropriate for you, contact your Merrill Lynch Financial Advisor, visit us online at or call MERRILL ( ). Merrill Lynch offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. Merrill Lynch and its Financial Advisors do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent tax or legal advisor as to any tax, accounting or legal statements made herein. Merrill Lynch is fully committed to Equal Employment Opportunity and to attracting, retaining, developing and promoting the most qualified employees regardless of race, gender, national origin, religion, sexual orientation, gender identity, age, disability, veteran status or any other characteristic prohibited by state or local law. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor does Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company. The term domestic partners is intended to encompass members of any same-sex partner relationship, including registered domestic partnerships, same-sex marriages, civil unions and committed though nonregistered domestic partnerships. 1 Before you invest in a Section 529 plan, request the plan s official statement from your Merrill Lynch Financial Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary s home state offers any state tax or other benefits that are available only for investments in such state s 529 plan. Section 529 plans are not guaranteed by any state or federal agency Bank of America Corporation. All rights reserved. ARQPGCSK BRO PM /2013

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